Monday, February 13, 2017

They knew it
or not but when group of merchants raised money for the Boston pier in 1772,
they were early pioneers of vehicle called REIT. The financing structure for
the pier – merchants owned the land together and shared the rent-after 250
years has become an important way for investors to earn hefty returns.

The idea behind
REIT is simple raise money from investors, buy property and share more than 90%
of its earnings back to investors. REITs have become an active tool to avoid taxes.
Many businesses started taking advantage of this structure and arranged
themselves as REITS.

Empire state
building owned by Empire State Realty Trust is one such building. The massive revenues
generated by visitors and rental income are distributed to the investors.

REITs take
money from retail investors, pool it and then invest it in real estate and
related projects. Real estate is capital intensive business and pooled funds
enable individual investors to own piece of lucrative real assets, much bigger
than they could manage or afford on their own. Apart from pooling of funds REITs
also offers investors the benefit of economies of scale.

Furthermore,
owning real assets through REITs keep you away from hassle of managing your
property. The collection of rent and maintenance is outsourced to REIT.

The dearth
of available options and illiquidity in realty sector makes REITs an attractive
option for small investors.

Investing in
REITs is like investing in real economy, unlike stock and bonds. REITs are
considered good alternative to bond markets and is considered to move in
opposite direction to stock market.

REITs are
also tax-efficient structure as they are treated as pipes, structure whose
returns are only taxed in the hands of investors. Its tax efficient character
is major attraction for many businesses to register themselves as REITs.

These are
more liquid than other forms of investments and attract new classes of
investors. Moreover they allow industrial companies and insurers to realize the
value of properties lying idle on their books.

Till date
there are 05 REITs management companies operating in Pakistan.
The number of REITs and asset under management is abysmally low. The
number can be compared with more than 40 mutual funds for the stock market,
worth capitalization of 75 billion $. Real estate market is worth a lot more
than that and even then there are only two REITs available to investors.

Although
Real estate took a nosedive after imposition of transaction tax on the sector
in the last budget, but it rebounded quickly owing to host of reasons.

Real estate
can offer tremendous growth to investors because of CPEC impetus, Trump effect
and rising unemployment of workers in Saudi Arabia, home to some 2 million
Pakistani workers.

Realty is a
save venue for parking untaxed wealth, and therefore expected to grow upward.
Moreover, the development in Gwadar would help Pakistan become a transport hub
for international trade, which would increase property prices beyond the
present level.

Commercial
as well as residential property market is facing shortage of supply. It is
expected that in 2025 Pakistan will be facing shortage of 20 million housing
units. The pooling of funds from savers and using it for development of
residential and commercial spaces will be a lucrative option for entrepreneurs
and investors at the same time offering living and working spaces to growing
population. The growing cement and construction sector will have excess
capacity after the completion of CPEC and it would be viable option to use that
capacity for construction.